Galtland Index

The Role of Monetary Policy

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The Role of Monetary Policy

The Role of Monetary Policy (1968) is Milton Friedman’s American Economic Association presidential address and the canonical short statement of monetarism: a map of what monetary policy cannot do, what it can, and how it should be conducted. It is the Chicago-school account of money and the cycle that the wiki’s Austrian sources take up and answer.

What the Address Argues

Friedman organizes the lecture around limits. Monetary policy cannot peg interest rates for more than a brief interval, and it cannot hold the rate of unemployment below its natural rate — the level set by the real structure of the labor market — except temporarily and at the cost of accelerating inflation. What policy can do is provide a stable monetary background: avoid being a source of disturbance, and keep the money stock growing at a steady, predictable pace.

The address also overturns the received reading of the Great Depression. Far from proving monetary policy impotent, the contraction of the early 1930s is, on Friedman’s account, evidence of its power misused: the monetary authorities allowed the quantity of money to fall by a third when they should have supplied liquidity. The policy conclusion is the k-percent rule — a steady, publicly stated rate of growth in the money stock (Friedman suggests something on the order of 3 to 5 per cent a year) in place of discretionary fine-tuning. The legislated form of that rule belongs to his earlier Capitalism and Freedom; here the emphasis falls on a stated, known, and publicly adopted rate. The natural-rate argument here is the same one he would develop in his 1976 Nobel lecture, and it correctly anticipated the stagflation that broke the simple Phillips-curve trade-off in the 1970s.

Why It Matters in This Wiki

This address is the positive monetarist core behind Austrian Economics vs the Chicago School. Its reading of the Great Contraction — the Fed sinning by doing too little, letting the money stock implode — is precisely the verdict Rothbard inverts in America’s Great Depression: for the Austrians the disease was contracted in the boom, not the bust, and a rule that pumps money fast enough to stabilize prices is the 1920s policy written into law. The steady-money rule the address proposes is the managed-money position the wiki’s hard-money commitments reject, and the natural-rate mechanism is the empiricist counterpart to the Austrian Business Cycle Theory the monetarists are said to lack.

Provenance: the ingested raw is an uncorrected OCR scan (pdftotext) of the JSTOR/AER edition; wording was confirmed against the scan before any quotation in the comparison article. This reference page is kept quote-free and paraphrases the argument rather than citing the OCR text directly. Copyright © American Economic Association — not public domain; ingested for research and citation.

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